Lockerby v. Sierra (In re Sierra)
9th Circuit Case No. 6-15928
August 7, 2008
This is a quick study in two published opinions about what it takes for a breach of contract claim to be nondischargeable under the "willful and malicious injury" provision of § 523(a)(6). One is the Lockerby opinion referenced above; the other is the January 2008 bankruptcy court opinion of Judge Perris' Home Instead Senior Care of Oregon v. Treon (In re Treon). Both of these rely heavily on a 2001 9th Circuit opinion, Petralia v. Jercich (In re Jercich), 238 F.3d 1202. The primary point of this quick study is to determine what if anything the recent Lockerby opinion added to the law on this issue in Oregon that wasn't already in Judge Perris' Home Instead opinion, other than the weight of greater authority. (Please see my earlier summary of this Home Instead opinion in the Oregon Bankruptcy Opinions section of my website.)
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These opinions are made a bit more personal in that Judge Perris was one of the three judges on the Bankruptcy Appellate Panel that had been overturned back in 2001 by the 9th Circuit in Jercich, which opinion she then used as her main precedent earlier this year in Home Instead.
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These opinions are made a bit more personal in that Judge Perris was one of the three judges on the Bankruptcy Appellate Panel that had been overturned back in 2001 by the 9th Circuit in Jercich, which opinion she then used as her main precedent earlier this year in Home Instead.
9th Circuit in Lockerby
In the recent Lockerby opinion the 9th Circuit held that "an intentional breach of contract cannot give rise to nondischargeability under § 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law." It overruled both the underlying bankruptcy court and the district court in determining that the claim against debtor was dischargeable. The debtor was an attorney, the creditor a former client. The claim, a rather odd one, was based on a settlement agreement entered into to settle a malpractice claim by the client against the attorney, through which the client was to receive 50% of attorney's proceeds on four of his pending personal injury claims; the attorney breached that contract when he determined for himself that the client did not have a valid malpractice claim against him.
The Court relied heavily on the 2001 9th Circuit Jercich opinion referred to above, saying: "The Jercich court undertook a two-part inquiry to determine whether the breach of contract rendered the debt excepted from discharge, first examining whether the debtor’s conduct was 'tortious,' and then asking whether the debtor’s conduct was both 'willful' and 'malicious.' "
Interestingly, after referring to this "two-part inquiry," it's entire remaining analysis seemed to be on the first part. "Something more than a knowing breach of contract is required before conduct comes within the ambit of § 523(a)(6) and Jecich defined that 'something more' as tortious conduct."
The issue then becomes what is tortious conduct for this purpose? Conduct is not tortious, according to Lockerby, again using Jercich as precedent, "simply because injury is is intended or 'substantially likely to occur,' but rather is only tortious if it constitutes a tort under state law." Otherwise, reasoned the Court, the core principle of debtors' "fresh start" would be seriously challenged, because a large portion of debts arise from debtors' intentional breaches that are substantially likely to harm the creditor. Since the debtor's breach of the settlement agreement was not tortious according to Arizona law, the creditor's claim arising from it was dischargeable under § 523(a)(6).In the recent Lockerby opinion the 9th Circuit held that "an intentional breach of contract cannot give rise to nondischargeability under § 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law." It overruled both the underlying bankruptcy court and the district court in determining that the claim against debtor was dischargeable. The debtor was an attorney, the creditor a former client. The claim, a rather odd one, was based on a settlement agreement entered into to settle a malpractice claim by the client against the attorney, through which the client was to receive 50% of attorney's proceeds on four of his pending personal injury claims; the attorney breached that contract when he determined for himself that the client did not have a valid malpractice claim against him.
The Court relied heavily on the 2001 9th Circuit Jercich opinion referred to above, saying: "The Jercich court undertook a two-part inquiry to determine whether the breach of contract rendered the debt excepted from discharge, first examining whether the debtor’s conduct was 'tortious,' and then asking whether the debtor’s conduct was both 'willful' and 'malicious.' "
Interestingly, after referring to this "two-part inquiry," it's entire remaining analysis seemed to be on the first part. "Something more than a knowing breach of contract is required before conduct comes within the ambit of § 523(a)(6) and Jecich defined that 'something more' as tortious conduct."
Judge Perris in Home Instead
Judge Perris' bankruptcy court opinion issued in January 2008, Home Instead Senior Care of Oregon v. Treon, involved a debtor's breach of a Non-Compete Agreement with her former employer.
The judge based her entire analysis of the facts under the Jercich standard:
Under Jercich, the first question in determining whether a breach of contract is excepted from discharge under § 523(a)(6) is whether debtor’s conduct was tortious. [Citation deleted.] The second question is whether the debtor’s conduct resulted in willful and malicious injury to the Home Instead. Both requirements must be met before a debt arising from conduct that also constitutes breach of a contract will be nondischargeable under § 523(a)(6).On the first question, the judge held that debtor’s breach of this Agreement was not tortious because the evidence did not establish 3 of the 6 necessary elements under Oregon law for the tort of intentional interference with an economic relationship: 1) a valid business relationship for debtor to interfere with, 2) her intentional interference with that relationship, and 3) a causal effect between this interference and the damage to the economic relationship.
Judge Perris also analyzed the second question of willful and malicious injury even though her "findings [on the tortious conduct question] are sufficient to support a decision in favor of debtor" "because [her] conclusions provide an alternative basis for [her] determination that debtor should prevail." She found that debtor's conduct was neither willful nor malicious, and so the creditor's claim was dischargeable for not meeting those criteria as well.
She went through this second question presumably because as the trial judge, she wanted to make a full record not just for the benefit of the parties, but also in case there was an appeal there would be an alternate basis to find in favor of debtor.
In contrast, at first glance it is not clear why the 9th Circuit in Lockerby presented Jercich's two-part inquiry but then did not apply the second part. Was it trying to change Jercich's holding without expressly saying so or did it not have to get into the second part because as the appellate court the first was sufficient. The Court answers this question itself: "Having determined that state specific tortious conduct is required under § 523(a)(6), we can only affirm the district court if [debtor] engaged in conduct that would constitute a tort under Arizona law." The Court found that the conduct did not, and so it could hold that a "breach of contract is not 'willful and malicious' under § 523(a)(6), allowing it to overrule the lower courts without needing to get to the second part.
Thus beyond clarifying Jercich and indirectly affirming Judge Perris' analysis in Home Instead, and of course adding the substantial weight of the 9th Circuit to this area of nondischargeability, Lockerby did not add substantially to what was already Oregon law through Home Instead.
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